Scribd
Upload
15 views4 pages

Chapter 7 Tutorial Notes - 1

Uploaded by

oloratomaneedi25
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
15 views4 pages

Chapter 7 Tutorial Notes - 1

Uploaded by

oloratomaneedi25
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

1

Tutorial notes

Chapter 7: Out of the blue Danude Menger and Austrians


reverse the tide

• Although Adam Smith, David Ricardo and Karl Marx had made
some several contributions to economics, Manger is the
vanquisher/overcomer of the Ricardian Theories.
• Manger’s theory of value, price and distribution is the best we have
up to now. In the era of manger, the number of newly established
industries started to rise in the western like never witnessed in
history.
• The average real wage rose, meaning workers now were starting
to have more money to buy goods and services to satisfy their
needs and wants.
• The per capita real income increased, it at least doubled, and
income distribution became slightly more equal.
• Poverty levels fell due to higher standards of living, rapid
economic growth.
2

Three economists make a remarkable discovery almost


simultaneously.
• William Stanley Jevons, Carl Menger and Leon Walras: came up
with the principle marginal utility.
 This ushered on the neoclassical marginalist revolution - the idea
that prices and costs were determined by final consumer
demand and their relative marginal utility.
• The principle of marginal utility
 In order to understand marginal utility, you firstly must
understand the definition of utility.
 Utility is the satisfaction you gain from consuming or using
the product.
 Marginal utility is then the additional satisfaction that you
gain as a result of consuming one extra unit.
• Example: given that you are consuming Lays Chips
Quantity Total Utility gained Marginal Utility
of Lays from consuming from consuming
consumed Lays Lays
1 10 0

2 20 10
3 25 5
4 29 4
5 32 3
6 34 2


3

 The price a buyer is willing to pay for a good depends on his marginal
utility, therefore a buyer buys goods as long as the marginal utility for
each additional unit exceeds its price and stops when price exceeds the
marginal utility.

Thus: Marger, Walras and Jevons rejected the objective cost


production theories of value (by David Ricardo and Karl Marx) and
focused instead upon the subjective principle of utility and consumer
demand as keystone of new approach to economics.

 They noted that individuals make choices based on preferences,


meaning that consumers always prefer the goods and services that
gives them higher utility or higher satisfaction, so utility and
demand are like complements they go together.
 If we recap back to Karl Marx and his labor theory of value, we can
clearly see that Marx concluded the value of a commodity is determined
by labor hours it took to produce that commodity.
 Marger and the other economics then disputed this and recognized
that no amount of labor or production confers value of the product.
They argued that price is determined by the cost of supply rather
than demand, whereas supply is determined by final demand in the
long run.
4

The Marginalist Principle Resolves the Paradox of Value

• The neoclassical economists took the principle of utility one step


further.
• They realised that the greater the quantity of a good the less
consumers will value any given unit.
 if there is a large amount of water available everywhere, an additional
glass of water will be relatively cheap.
 if a community lives in a desert, the community will highly prize each
additional unit of water.
 if diamonds are abundant, the price of diamonds falls.
 if diamonds are scarce, the price goes up.
 Thus, the neoclassical economists discovered the principle of
diminishing marginal utility.
Marginal utility eventually declines as you consume more of the
same product and this is called the Law of diminishing marginal
returns (seen in the Lays example).

The Law of imputation: inputs depend on outputs.

• This law states that the demand and price of inputs that are
used in the production process are basically dependent on the
consumer demand.
 The tobacco example supposes that the final consumer demand for
tobacco falls to be zero, meaning there are no people smoking or
using or buying tobacco.
 As result the price of tobacco would fall, thus raw tobacco leaves and
that is used as input in production of tobacco would also fall, meaning
that inputs and capital gods of tobacco were entirely dependent on
individual consumer demand who desire the product.

You might also like